Canterbury City Council v Roads and Traffic Authority of New South Wales

The resumed land 6 Although not contiguous, the land the subject of the first and second acquisition extends in a virtual line from King Georges Road in the west to Bexley Road in the east, forming part of the open space along the Wolli Creek corridor. At the date of acquisition it was generally free of structural improvements, and it was used as open space for active and passive recreation. 7 Not all the land that was resumed is subject to the claim for compensation. Some of the land was subject to a trust to make it available without cost to the constructing authority for the purpose of a count7y road. No compensation is claimed in respect of this land. Nor is compensation claimed in respect of the sub-surface strata that have been acquired having regard to s 62 of the Just Terms Act. The remaining land, classified by Mr S Czeref, a town planner who gave evidence for the council, as category 2 and category 3 land, is subject to the claim for compensation, and I shall refer to this land as "the resumed land".

8 With the exception of lot 270 (which appears to be part of lot 27 shown on the RTA plan) and lot 5, all of the resumed land was, at the date of acquisition, classified as "community land" under the Local Government Act 1993 ("the LG Act"). Section 35 of the LG Act provides that community land is to be used and managed in accordance with the plan of management applying to the land. Under s 45, a council has no power to sell, exchange or otherwise dispose of community land. It may, however, be leased, subject to the various restrictions which are set out in s 46 of the LG Act. Land classified as community land can only be re-classified as operational land by either a local environmental plan or by a resolution of the council after public notice (ss 27, 33 and 34). 9 Although reports from planning experts were tendered, those experts agreed that, with the exception of lot 270, the resumed land was either zoned for open space or should be treated as if it were zoned for open space. Accordingly, the parties agreed, and the hearing proceeded, on the basis that the highest and best use of the resumed land is for active and/or passive open space purposes (cf Turner & Anor v Minister of Public Instruction (1956) 95 CLR 245). 10 Lot 270 was zoned for residential purposes, and the parties agreed that the value of lot 270 for compensation purposes is $225,000. 11 Lot 5 was not classified as community land - it was held as operational land, and therefore not subject to the statutory restrictions. 12 A further matter concerning the nature of the resumed land is that a part of the land subject of the second acquisition is in a natural watercourse, and part is in a concrete channel. To take account of these features, Mr T M Dundas (who gave evidence for the council) made adjustments to the values which he adopted. On the other hand, Mr K D Wood, who gave evidence for the RTA, regarded the natural watercourse and the concrete channels as integral features of the resumed land and made no adjustment by reason of these physical characteristics. I consider that Mr Dundas's approach in this regard is the correct one. It reflects the characteristics of the resumed land in the hands of the owner, and I think that the appropriate adjustments should be made.

Mr Dundas 13 The council relied upon the valuation prepared by Mr Dundas. Mr Dundas concluded that the market value of the leasehold interest in the resumed land the subject of the first acquisition (and thus the amount to be paid as compensation) should be $2,500,000, and for the leasehold interest in the resumed land the subject of the second acquisition, it should be $230,000. 14 In reaching these conclusions, Mr Dundas adopted the following approaches: · The first step was to determine the market value of the resumed land, by reference to what he considered to be comparable sales. For the resumed land in the first acquisition, Mr Dundas determined a value of $250 per square metre. For the majority of the resumed land in the second acquisition, he determined the same value of $250 per square metre, but determined $125 per square metre in respect of land in the natural watercourse, and $20 per square metre for the land in the concrete channel; · As I have earlier indicated, the value of lot 270 was agreed at $225,000, and Mr Dundas adopted that agreed figure; · His preferred method of valuation was the "before" and "after" method. That involves determining the market value of the land immediately prior to the lease and the market value immediately after the lease, the latter value obtained by deferring the market value for the four year period of the lease at 6%. The difference represents the loss in value consequent upon the resumption and therefore the compensation to be paid; · His alternative method was to determine a premium rental for the resumed land and to capitalise it for the term of the lease. In applying this method, he adopted a rental of 6% of the market value, and capitalised the present value of that sum for four years at 10%. Mr Wood 15 The RTA relied upon the valuation prepared by Mr Wood. Mr Wood concluded that the compensation payable in respect of the leasehold interest in the resumed land the subject of the first acquisition was $100,000 and in respect of the leasehold interest in the resumed land the subject of the second acquisition, $12,400. 16 Mr Wood also determined the value of the land per square metre by relying on sales that he considered to be comparable. These yielded a figure of $50 per square metre in respect of the whole of the resumed land. He then applied a discount of 2/3 to reflect the statutory restrictions on community land. 17 His valuation approach was to adopt a premium rental capitalised over the four years of the lease at 10%. In applying this method, Mr Wood selected a rental factor of 3%. 18 These competing valuations throw up the following issues for determination. They are as follows: (1) What are the most comparable sales upon which reliance should be placed? (2) What discount, if any, should be made by reason of the restrictions under which the resumed land was held at the date of acquisition? (3) What is the significance, if any, of cl 4.1 of the lease, requiring the payment "… as a rental compensation …" determined under the Just Terms Act? (4) What is the most appropriate method of valuation - should it be Mr Dundas's preferred "before and after" method, or should it be the alternative premium rental method? (5) What is the appropriate rental factor to apply - should it be 6% or 3%?

Issues (1) and (2) - comparable sales and discount factor 19 Section 55 of the Just Terms Act requires regard to be had to the market value of the resumed land on the date of its acquisition. In defining "market value", s 56(1) of the Just Terms Act adopts the Spencer test (Spencer v The Commonwealth (1907) 5 CLR 418) by providing relevantly as follows: "market value" of land at any time means the amount that would have been paid for the land if it had been sold at that time by a willing but not anxious seller to a willing but not anxious buyer … 20 In approaching market value, it is necessary to have regard to the value to the owner who parts with the property, not the value to the new owner who takes it over, and, accordingly, if the old owner held the property subject to restrictions, it is necessary to inquire how far these restrictions affect its value (Corrie and Anor v MacDermott (1914) AC 1056 at 1062). 21 In this case, the market value of the resumed land must be determined having regard to the fact that its highest and best use is as open space for passive and active recreation, and having regard to the fact that the council held the resumed land as community land, subject to severe restrictions on sale, exchange and disposal as provided in the LG Act. 22 The conventional approach to determining market value is to have regard to comparable sales. The difficulty with this case is that there are no truly comparable sales, since land zoned as open space and held as community land cannot be sold. Each valuer approached this problem in different ways. 23 Mr Dundas had regard to a number of sales of land zoned for residential purposes but purchased by councils for the purpose of open space. By reference to land at 50 Knox Street, Belmore ($286.80 per square metre), 78 Duke Street, Campsie ($708 per square metre), 451 Forest Road, Penshurst ($349 per square metre), 453 Forest Road, Penshurst ($457 per square metre) and 22 - 24 Kendall Street, Sans Souci ($156 per square metre), Mr Dundas adopted a value of $250 per square metre for the resumed land.

24 Mr Wood expressly rejected the approach of comparing sales of land zoned for a high purpose such as residential and then "… making an arbitrary reduction to bring to account the restrictions …" placed on community land. Instead he had regard to sales of land zoned for what he regarded as a purpose similar to open space. The sales that he regarded as comparable were land at Punt Road Gladesville (a sale of land zoned special uses 5(a) between the NSW Health Administration Corporation and the National Parks and Wildlife Service at $49.40 per square metre), at Rodney Street, Dover Heights (a sale of land zoned open space between the Department of Defence and the NSW Government at $62 per square metre), at Crawford Road, Brighton Le Sands (a sale of land zoned special uses education between the Department of School Education and the local council, at $48 per square metre), at Signal Hill Reserve, Old South Head Road, Vaucluse (a sale of land zoned special uses between the Department of Defence and the NSW Government at $134 per square metre) and a sale of land zoned rural 1(a) being the Milperra Sports Centre at $24 per square metre including improvements. He adopted $50 per square metre as the appropriate value. 25 There are difficulties with the approach of both valuers. The sales relied on by Mr Dundas are sales of residential land acquired by the relevant councils for the purpose of open space. But the resumed land in this case was not residential land at the date of its acquisition (cf Hurstville City Council v Roads and Traffic Authority of NSW (1999) NSWLEC 100 per Talbot J at pars 21, 22 and 27). Nevertheless, in contrast to the sales relied upon by Mr Wood, the sales relied on by Mr Dundas seem to me to be somewhat closer to the mark. They are arms length sales, negotiated in the open market in respect of land to be used for open space. The figure of $250 per square metre is less than the average of the sales he took into account, and substantially less than four of those five sales. He explained that he made some adjustment to reflect the size of the area of the resumed land. 26 The sales relied upon by Mr Wood are sales of open space land but, except for the Milperra Sports Centre, they were each sales between government entities. The RTA endeavoured to meet the criticism that those sales do not reflect market value by tendering a copy of a treasury direction number TD92/2 entitled "Sale or Lease of Government Assets". The treasury directive provides that, in the absence of specific approval to the contrary, market values should be realised on the sale of government assets. The RTA called two NSW Treasury officers, Ms S Power and Mr M Smith, to give evidence that, to their respective knowledge, this directive has been continually followed since it came into operation, and there has been no contrary approval. Nevertheless, even accepting that there was no apparent departure from the treasury directive in each case, those sales were not at arms length and at the very least some care should be taken in adopting them as the basis for deriving market value. Furthermore, some of the sales were made in circumstances that cast a doubt on their applicability. The sales of Signal Hill and Rodney Street were a swap of land for land at Richmond. The sale of Brighton Le Sands was made against some political and community opposition. The Milperra sale involved land that had income earning potential as a sports centre. 27 I turn to the issue of the statutory restrictions to which the resumed land was subject as at the date of its acquisition. There is authority for adopting the approach of discounting the value of the resumed land to take account of those statutory restrictions. That approach would be consistent with the principle stated in Corrie v MacDermott (and see the comments as to taking the statutory restrictions into account in pars 22 - 26 of the judgment of Mason P in Roads and Traffic Authority of NSW v Hurstville City Council (2001) 112 LGERA 223). That approach had been adopted by Bannon J in Hornsby Shire Council v Roads and Traffic Authority of NSW (NSWLEC, 29 May 1996, unreported) (the judgment at first instance) and it was held to be the correct approach on appeal (Hornsby Shire Council v Roads and Traffic Authority of NSW (1998) 100 LGERA 105 (the judgment on appeal)). 28 Initially, Mr Dundas made a deduction of 50% to take account of the statutory restrictions. This resulted in him adopting a value of $125 per square metre. However, in a subsequent report, he altered this approach, on the basis that, where councils have purchased land to provide open space, they have done so knowing that the land will be classified as community land and subject to the restrictions under the LG Act. There is therefore no justification, in his opinion, for a further discount for these restrictions and consequently his final valuation was $250 per square metre for the majority of the resumed land. This approach does not accord with principle, and Mr Dundas's initial approach seems to me to be correct.

29 On the other hand, Mr Wood approached the problem of the statutory restrictions by deducting 2/3 of the value of $50 per square metre. He was criticised for this approach on the basis that it involved "double-dipping". That seems to me to be a justifiable criticism. He said, at p 15 of his report relating to the first acquisition, that "[i]n determining the Market Value of land designated for community use/open space purposes, I have had regard to sales of land the subject of similar zoning restrictions". At p 18 of the same report, he said: "I consider these restrictions (the statutory restrictions) are captured in the prices achieved for the sale properties because of their restrictive zonings". I take these comments to mean that he regarded as comparable those sales that, in his estimation, were based on similar restrictions, but yet in his revised calculations he deducted another amount,- being 2/3, to account for those same restrictions. This approach is not correct. 30 Doing the best I can, having regard to the lack of truly comparable sales, the evidence of values between $50 per square metre and $250 per square metre, and the necessity to take account of the statutory restrictions, I consider that a fair market value to apply is $125 per square metre. 31 In so concluding, I am rejecting the submissions made by Mr Tomasetti to the contrary on behalf of the council. My reasons for doing so are as follows: (1) Mr Tomasetti placed considerable reliance upon the following passage from the judgment of Gobbo J in Mayor, Councillors and Citizens of the City of Brighton v Road Construction Authority (1986) VR 255 at 263: It is well-established that in valuing the land, it must be valued with all t he restrictions. It is also clear that the proper approach in estimating the likelihood of a removal of restrictions is not to assume that the land is free of restrictions and then to impose some deduction for the presence of restrictions: see Corrie v McDermott …; Royal Sydney Golf Club v Federal Commissioner of Taxation (1955) 91 CLR 610 . At the same time it is necessary to guard against the view that restrictions, because they restrict the class of potential purchasers, inevitably mean a lower value. This passage is, however, of no assistance in this case. It refers to the likelihood of a removal of restrictions, but in this case, the likelihood of re-classification of the resumed land from community land to operational land (which is free of the particular restrictions) is very low. The evidence establishes that there is a lack of open space land classified as community land in the Canterbury local government area, and there are statutory hurdles to overcome in achieving a lifting of the restrictions (see Hornsby Shire Council v Roads and Traffic Authority (the judgment on appeal) per Stein JA at 108). Furthermore, this case is not one where the statutory restrictions simply reduce the class of potential purchasers - there are no potential purchasers, since the resumed land could not have been sold prior to its acquisition. (2) Mr Tomasetti sought to distinguish Hornsby Shire Council v Roads and Traffic Authority (where the approach of discounting the value by reference to the same statutory restrictions was adopted and approved on appeal) by reference to the fact that the land the subject of that case was different in character to the land in this case, and by reference to the fact that open space land in the Hornsby shire was not in as short a supply as in the Canterbury local government area. However, these matters do not derogate from the principle that the statutory restrictions must be taken into account, and one method of doing so is to discount the value by reason of them. (3) Mr Tomasetti submitted that Ashfield Municipal Council v Roads and Traffic Authority of NSW (2001) 117 LGERA 203 is authority for the proposition that restrictions upon the use of land, which do not affect the use of that land for open space purposes, are of little significance in determining the value of the land. However, the nature of the statutory restrictions that applied to the land in Ashfield Municipal Council v Roads and Traffic Authority arose under the Crown Lands Act 1989 and are of quite a different category to those that arise in respect of community land under the LG Act. The statutory restrictions in this case are not rendered any less significant because, under the LG Act, community land may be leased (subject to certain limitations) and because there are a number of permissible uses available to land zoned open space 6(a) under the Canterbury Planning Scheme Ordinance 1970. The facts of this case are that the resumed land could not be sold and, by reason of its use for active and passive recreation immediately before its acquisition, it was unlikely to be leased for any permissible purpose. Accordingly, I regard the statutory restrictions as significant.

Issue (3) - the significance of cl 4.1 of the lease 32 Some debate ensued at the hearing about the significance of cl 4.1 of the lease. It provides as follows: 4.1 Rental

The Authority shall pay as a rental compensation as determined by the Valuer-General pursuant to the provisions of the Land Acquisition (Just Terms Compensation) Act 1991, or failing agreement between the Lessor and the Authority as to the amount of compensation, compensation as determined in any proceedings brought by the Lessor in the Land and Environment Court. 33 On its proper construction, cl 4.1 it provides for the RTA to pay a rent to the council, and the amount of that rent is to be the compensation determined under the Just Terms Act in respect of the leasehold interest acquired. It is not correct to say that the lease provides for nil rent. It provides for a rent at a sum equivalent to the compensation payable to the council by reason of the acquisition. Clause 4.1 does not require this Court to determine a market rent for the leased land, and then determine that market rent to be the compensation payable under the Just Terms Act. The proceedings before the Court require determination of compensation in accordance with the provisions of the Just Terms Act in respect of the leasehold interest in the resumed land. The bargain between the council and the RTA requires that the amount so determined is to constitute the rent payable under the lease by the RTA to the council.

Issue (4) - the appropriate method of valuation 34 Clause 4.1 of the lease is a factor that suggests that the preferred method of Mr Dundas is not the correct approach. Mr Dundas opted for the "before and after" approach (which I have outlined in par 14 above). He conceded, however, in his report and in giving oral evidence, that this approach is commonly utilised when valuing premises affected by restrictive leases, such as controlled tenancies under the Landlord and Tenant (Amendment) Act 1948, or the interest of a remainderman subject to a life estate. The lease in the present case is not such a lease. It bears, rather, the characteristics of a lease as to term, use and, in particular, rent. And it is to be borne in mind that the council is to be compensated for the leasehold interest acquired. I would prefer, therefore, to adopt the alternative approach, the premium rental approach (described in par 14 above) also utilised by Mr Dundas and utilised by Mr Wood. The "before and after" approach can, at best, be used as a check on the premium rental approach, as observed by Talbot J in par 19 of his judgment in Hurstville City Council v Roads and Traffic Authority.

Issue (5) - 6% or 3%? 35 Mr Wood derived a figure of 3% to determine the rental for the purpose of the premium rental approach. He did so by analysing rentals being achieved in the Sydney metropolitan area for residential properties. They ranged from 4% to 7% of market value, that is, of the value of land plus buildings. He concluded that 3% was appropriate for open space land held as community land. 36 Mr Dundas selected 6%, by reference to the rentals being charged for the leasing of vacant land by government authorities. They ranged from 10% through to 8.5%, and he concluded that 6% was fair and reasonable to apply. 37 I prefer Mr Dundas's approach. Rentals obtained by government authorities for the leasing of vacant seem to me to be more comparable than rentals obtained for residential properties. The lease between the parties is, after all, a lease of vacant land between the council and the RTA. I note also, although not determinative, that a figure of 6% has been adopted in other cases - see, for example, Prince Alfred Park Reserve Trust v State Rail Authority of NSW (1997) 96 LGERA 75.

The compensation payable 38 I adopt, for the reasons I have outlined, the initial calculations carried out by Mr Dundas upon his alternative basis (premium rental) in order to determine the amount of compensation payable. Those calculations take into account: · A market value of $125 per square metre, except in relation to lot 5, which is operational land, and is valued at $250 per square metre; · The agreed value of lot 270; · The adjustments made in respect of the natural watercourse and the concrete channel; · A rental of 6%. 39 Accordingly, I determine compensation as follows: (1) In proceedings 30244 of 1998, the council is entitled to compensation made up as follows: (a) the market value of the leasehold interest in the resumed land in the amount of $1,200,000; (b) legal and valuation expenses; and (c) statutory interest. (2) In proceedings 30022 of 1999, the council is entitled to compensation made up as follows: (a) the market value of the leasehold interest in the resumed land in the amount of $127,428; (b) legal and valuation expenses; and (c) statutory interest. (3) I reserve the question of costs of each proceedings. (4) The exhibits may be returned 40 I direct the parties to bring in within seven days short minutes of orders giving effect to this judgment.

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